Market Makers Seek Knight’s Order Flow
Traders Magazine Online News, November 29, 2012
Get more order flow, now.
That’s what industry observers say is driving the two market-making and electronic trading firms that have submitted offers to buy Knight Capital Group, the high-profile firm that suffered a nearly fatal self-inflicted technical wound in August.
The market-making business is ripe for consolidation because of sluggish trading volumes, say industry analysts. Volume on the ten major national exchanges in the first ten months of this year is down 28%, according to statistics compiled by the Securities Industry and Financial Markets Association.
So the potential purchase of big liquidity provider Knight Trading---by either Global Electronic Trading Company (Getco), or New York-based Virtu Financial---makes sense as a means for either firm to pump its own trading volume back up, according to industry analysts.
“It really has more to do with acquiring more scale more than Getco is good at one thing and Knight is good at something else,” says Adam Honore, research director for Aite Group. He notes both Virtu and Getco are high-frequency market makers and designated market makers on the New York Stock Exchange and NYSE MKT, formerly the American Stock Exchange or NYSE Amex.
On Wednesday, Knight disclosed to the Securities and Exchange Commission that Chicago-based Getco had made a bid for the brokerage (See below:” Knight, the Huge Liquidity Prize”). But it would not comment on the bid, which basically equates $3.50 a share and could end up with a final price tag of $1.4 billion to $1.8 billion in a stock and cash deal. Virtu submitted an all-cash offer of at least $3.00 a share, according to multiple press reports. But Knight has not yet filed any report describing a Virtu bid to the SEC.
Virtu and Getco are similar firms and have the most to gain in buying Knight, say Honore and other experts.
“Both specialize in electronic market making. They both emphasize algorithmic high speed trading and market making,” said an industry observer who couldn’t be quoted by name, but who knows the three firms very well. He said either firm would benefit from picking up Knight because it would provide much more volume.
“Getco sees this as a way to expand their footprint. They want it so they can acquire a lot more flow,” adds Keith Ross, chief executive officer of PDQ, a Chicago-based dark pool operator. He said that Knight’s systems would improve Getco’s ability to trade more efficiently. (See below: “What Is Getco?”)
“I interpret that bid as a long term commitment by Getco to create value in the new company,” according to Ross. Honore said that Getco is very similar to Jersey-City based Knight except it is smaller.
“There’s would be a lot of synergy if you put the two together,” he adds. “You’ve got Knight with some key strengths in the FX space. You have Getco with some strength in the futures and options markets. You get that synergy between New Jersey/New York and Chicago.”
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